Rite Aid (NYSE:RAD) Shares Surge on Strong First Quarter Sales

Rite Aid (NYSE:RAD) had the right stuff when it delivered the first quarter 2020 results on June 25^th. The stock jumped more than 26% in reaction to the company's better than expected report that showed consumers flocked to its stores for cleaning supplies, personal care products, and other essential goods in response to the coronavirus pandemic.

Revenue increased 12% year-over-year to $6.03 billion handily topping the consensus estimate of $5.6 million. Excluding cigarette and tobacco products comparable-store sales rose 6.6% driven by a 16% increase in front end comparable sales. Pharmacy comparable sales increased a more modest 2.2%.

It recorded a net loss of $72.7 million which marked an improvement over the $99.3 million loss from the first quarter of 2019. The adjusted loss per share of $0.04 was narrower than the $0.14 adjusted loss per share of a year ago and considerably better than the FactSet analyst consensus of a $0.38 loss.

Aside from the top line outperformance, investors applauded the convenience store operator's forecast of becoming free cash flow positive in fiscal 2021.

Rite Aid has struggled in recent years to generate positive free cash flow amid rising expenses and a heavy debt burden. It exited the quarter with a cash balance of $288 million and a net debt position of $3.06 billion.

The company is, however, EBITDA positive. It recorded a slightly lower adjusted EBITDA of $107.4 million for the first quarter due to higher wellness-plus member markdowns tied to the increased sales volume and higher employee appreciation discounts.

Retail Sales Rise Amid Pandemic Demand

The $258 million of incremental retail pharmacy revenue was driven by robust sales in Rite Aid's core product categories such as cleaning supplies and disinfectants to combat the pandemic. Part of the front-end sales success was driven by its recently formed partnership with grocery delivery company Instacart which significantly expanded its home delivery capabilities.

Pharmacy sales were hampered by a 14.8% decline in acute prescriptions. This was the result of postponed outpatient medical visits and elective surgery procedures due to the COVID-19 crisis. Growth in maintenance prescriptions from medical adherence and personalized interventions, however, more than offset this headwind resulting in overall pharmacy sales and prescription count growth.

The company said it incurred significant incremental expenses because of the pandemic which led to a negative COVID-19 impact on the quarter of $30 million.

Rite Aid was one of the first corporations to adopt COVID-19 testing. In collaboration with the U.S. Department of Health and Human Services, it established 97 testing sites with the capacity to conduct over 48,000 tests weekly. It also recently launched a new telehealth service called Rite Aid Virtual care in response to increasing patient needs for remote health care

Second Quarter off to a Healthy Start

The first-quarter report suggests that Rite Aid is on its way to becoming free cash flow positive. Management's forecast of achieving this milestone by the next fiscal year offered hope that the company's turnaround efforts are bearing fruit. It remains to be seen, however, if the recent performance can be sustained if COVID-19-related sales volumes start to wane.

Citing the impact of COVID-19 on its operations, management withdrew its near-term guidance. However, it noted that through the first three weeks of June, same store front end sales increased 7.2% driven by demand for personal care, paper products, and over the counter (OTC) medications. Same-store prescription counts increased 0.8% over the same prior-year period as the impact of acute prescription declines has lessened.

Rite Aid management has made cost reduction a key focal point during the pandemic and eliminated 254 corporate office positions across the Retail Pharmacy and Pharmacy Services segments. It has also targeted advertising, rent, shrink, travel and call center expenses. It expects these reductions to drive cost savings of more than $40 million in fiscal 2021.

Comeback Trail is Long and Steep

Intense pressure remains on the company to orchestrate a turnaround in both its retail and pharmacy businesses. Prior to the pandemic, retail sales were weak and insurer reimbursement issues limited pharmacy revenue. And despite reaching an agreement with rival pharmacy retailer Walgreens to sell roughly half its stores, its high debt level complicates the challenge.

Meanwhile, pressure has also been applied by investors. Following a 1-for-20 reverse stock split in April 2019, the company's stock price is still a shell of its former self.

Today, Rite Aid is a smaller fish trying to stay afloat in a highly competitive retail pharmacy industry that includes financially healthier companies like Walgreens and CVS. With new CEO Heyward Donigan trying to right the ship, there are signs of early progress, but much work remains.